O.E.C.D. Warns Slovenia on Banking Crisis

By REUTERS

April 9, 2013

LJUBLJANA, Slovenia — Slovenia, trying to avoid becoming the euro zone’s next bailout victim, may have ‘'significantly'’ misread the cost of fixing its troubled banks, the Organization for Economic Cooperation and Development said Tuesday.

Following the messy rescue of Cyprus last month, Slovenia, a country of 2 million perched on Italy’s northeast border, is facing intensifying market pressure while seeking funds to heal its state-owned financial sector.

The O.E.C.D., which includes 34 developed countries, said in a report that Slovenia should save state-owned banks that are viable and sell them into private hands, and allow those that are not viable to fail.

According to an assessment made last year, the local banks, mostly state-owned, are burdened with 7 billion euros, or about $9 billion, in bad loans — a fifth of Slovenia’s gross domestic product.

The country risks falling behind in its race to catch up with Western living standards, the Paris-based organization said.

The report predicted a second straight year of economic contraction, by 2.1 percent. It also said that Slovenia’s public debt had more than doubled since 2008 to 47 percent of gross domestic product and that it could rise to 100 percent by 2025 if no changes are made.

Facing uncertain costs to bail out its lenders, continued pressure on its exports from the euro zone crisis, and a rise in lending costs after Cyprus’s bailout, Slovenia has one of the worst economic outlooks in the O.E.C.D., the organization’s report said.

‘'Against this difficult background and with a possible further deterioration in the international environment, Slovenia faces risks of a prolonged downturn and constrained access to financial markets,'’ the report said.

It recommended that the government increase the powers of the competition office, gradually raise the retirement age, wean wealthier citizens off family benefits, cut unemployment and other benefits, and improve efficiency in education and health care.

Slovenia is the only former communist European Union state that declined to sell most of its banking sector into private hands, a strategy that led to political influence, mismanagement and disastrous lending that has now put the lenders at risk.

‘'Slovenia is facing a severe banking crisis, driven by excessive risk-taking, weak corporate governance of state-owned banks and insufficiently effective supervision tools,'’ according to the report.

Last year’s estimate of the level of bad loans in the banking system is outdated and was created by methodology that was weak and nontransparent, so the real damage could be worse, the organization said.

‘'Capital needs are uncertain and could in fact be significantly higher,'’ it said.

The O.E.C.D. said it welcomed a plan by the Slovenian government to create a so-called bad bank to take nonperforming loans away from state banks, but it said that ‘'lack of transparency and potential political interference pose risks.'’

It added that weak corporate governance and credit misallocation could potentially be attributed to corrupt behavior.

The organization also urged the government to start new stress tests of the banking sector based on a more robust methodology, and to publish the results before recapitalizing distressed but viable banks, preferably through share issues.

But it said market valuation showed that equity in state banks had been ‘'virtually wiped out,'’ and that Slovenian banks that were nonviable should be wound down, with holders of subordinated debt and lower-ranked capital instruments absorbing losses.

Slovenia should then privatize the banks, the Organization for Economic Cooperation and Development said. It criticized a plan being discussed by the current left-of-center government for the state to retain a blocking minority, saying such a move could lead to political interference and new problems.

It said failure to pursue the changes pledged when the government in Ljubljana tapped the dollar debt market last year could ‘'significantly raise borrowing costs,'’ as could a higher-than-expected bill for recapitalizing banks. All of this has put pressure on growth, the report said.

‘'Potential growth has fallen significantly since the outset of the crisis,'’ it said. ‘'As a result, Slovenia is unlikely to resume the catching up toward more developed O.E.C.D. countries soon.'’